“A 3 Step Bumpy EU Energy Ride”

“A 3 Step Bumpy EU Energy Ride”

Jean – Michel Glachant Holder Loyola de Palacio Chair in European Energy Policy

Director Florence School of Regulation (European University Institute in Florence)

www.florence-school.eu

Intro 3 step: which ones?

• Step 1: getting an internal EU market for electricity? Roughly Yes! Does it matter? Much less than expected…

• Step 2: getting an internal EU market for gas? More or less a kind of! Does it matter? Not much…

• Step 3: do these markets interact with other pillars of EU energy policy (Security of Supply; 20-20-20 targets)? Yes! They do a lot: they do their job…. (but no more)…


STEP 1/ An EU internal market for electricity… a journey from 1990 to 2015…

• Four “Yes” in four directions

• 1/ Short term Day ahead wholesale markets connected by implicit access to physical interconnections

• 2/ Very short term balancing services crossing the borders of “electrical zones”

• 3/ Retail competition blessed since a decade (2nd Package)

• 4/ Long Term Europeanization of grids operation and investment going ahead (TYNDP – Grid Codes – PCIs)


Done?

• Not so sure?

• 1/ Price control still in place (see France or Spain) 10 years after the official launching of retail competition…

• 2/ Wholesale access control (see again France or Spain)


Done? (2)

• Certainly not…

• 1/ New Wholesale revolution ignited by RES public push

• 2/ New retail revolution pushed by RES public push (millions of “prosumers”) and smart retail grids

• 3/ But but: that comes more from EU “Out of the market” energy policy than from the market … To be looked at latter on…


Concl for elec internal market?

• 1/ Done in the EU and nowhere else in the world (notably not in the US)

• 2/ Done our way (other exist as “Wholesale” mkt with no retail; or centralized wholesale mkt as PJM or UK 1990 etc.)

• 3/ Does not matter that much: why? It is an internal market conceived in the 90’ to spur a “CCGT wave & Dash for gas” all over the EU.

• 4/ Alas today we have massive national RES public pushes… and massive CCGT redundancy (Spanish LNG terminals working only at 50% capacity)

• 5/ Will we soon destroy all our EU market or rebuild it before the 2020 horizon?


STEP 2/ An EU internal market for gas… much more difficult …

• Elec & Gas: both monopolies

• But: Elec has thousands of production units inside our EU monopolies + a common multidirectional grid (= easy entry with a small new CCGT plant);

• Gas: a handful of foreigner producers + “point to point” grids… all tied with long term contracts (= hard to enter)

• Long way to go: to open new LNG terminals (big units) + undo long term contract freezing of grids (Italy did 2 years ago)

• BUT with help of economic crisis (-10% à to -20% gas consumption) it suddenly worked: single price zone Denmark to Italy; UK to Austria…


gas… more difficult … but

• BUT BUT: we are also starting implementing an harmonized & open internal market

• HARMONIZATION of transmission products across countries through existing interconnections: PRISMA trading platform

• More advanced: Entry-Exit zones suppressing “point to point”

• Even More Advanced : merger of trading zones keeping different short term balancing services on each border

• Other more advanced tool: Market zones connected by implicit access to physical interconnections (Market Coupling)

• Also starting: Long Term Europeanisation of grids operation and investment (TYNDP –Grid Codes – PCIs)


Done?

• For 80% of EU gas it works… quasi single price

• But fragile… sensitive to low gas consumption (hence length of economic crisis)

• …And short term price convergence (day ahead) >> Long Term price of gas &capacity of physical transportation of gas inside EU and

• …And quite high price level: EU short term price of gas = 3 times the reference gas price in the USA (imagine oil price x 3 times! !!)


Concl for gas internal market?

• 1/ Among big countries only EU and US have open gas markets (but not of the same kind)

• 2/ US produces own cheap gas in an open architecture of “long term contracted / fully booked / point to point “ gas grid

• 3/ EU imports expensive gas from quasi cartel (Russia, Algeria, Norway) + from other LNG providers in a regulated frame of socialized “entry/exit” zones

• 4/ As Asia today sucks all LNG available & USA cannot flood the entire world with shale gas

• 5/ EU cannot get the US low price while escaping the Asia record price. For how long? Hum: let’s see…


STEP 3/ How internal markets interact with EU energy policy … as they should… as markets…

• EU Elec market with 1/ “20-20-20 targets”; 2/ gas market; and 3/ “Security of Supply”

• 1/ “20-20-20 targets”: Angela Merkel (EU Council Berlin 2007) 20% reduction GHG emissions + 20% Renewables + 20 % more energy efficiency

• 20% GHG: automatic in the elec sector – elec cannot pollute more than permits emitted – only unknown there: carbon market price

• 20% RES: not needed to reach GHG target – is an EU industrial policy (to start a “Green Industrial Revolution”) - by substituting local energy production to energy imports

• 20% Energy Efficiency: not needed to reach GHG target – is a second EU industrial policy (to start a “Green Industrial Revolution”) - by substituting higher quality goods to energy consumption


Elec market interacts… … but

• BUT: RES target (= percentage of non polluting energy) and Energy Efficiency target (= volume of energy consumed) influence C02 emissions; hence the demand for C02 permits; hence: C02 price is an end result of the 2 other targets and not a key driver for GHG emission reduction

• RES target takes the lead: pushed by feed-in tariffs both wind and sun tak off (Germany 2006 23GW / 2011 53 GW)

• In a depressing market: German wholesale price down from 75 Euro MWh in 2008 to 36 Euro 2013

• But RES paid outside the market: German RES surcharge 2014 (64Euro MWh) Total Year2006 4Bn Euro - Year2013 20Bn Euro


Elec interacts… … but(2)

• BUT ”scissors effect” for consumers: German wholesale price 2008-2013 (– 40 Euro) MWh and Retail price (+ 40 Euro) <<UK retail price x3 in 10 years>>

• Plus “squeeze” for thermal plants : Germ. wholesale market price 36Eur vs total cost Coal gen. 55Eur / Gas 70 Eur

• Economic alternative to RES & to Fossil Fuel? Nuclear? UK government recent contract with EDF & Chinese at 108 Eur MWh… (German wind onshore 80 Eur)

• A kind of deadlock?


Gas interacts… … but

• Can gas “cleans” the energy mix? Yes by replacing coal (x 2 times more polluting with > 0.8 ton CO2 MWh). Ex: in USA GHG emissions at their lowest since… 1994.

• In EU however coal ousts gas: German coal near to record 50% elec generation this year

• Why so much coal in EU? German wholesale price 36Eur Total cost Coal gen. 55Eur (Only coal + CO2 = 28Eur)

Total cost Gas gen. 70Eur (Only gas +CO2 = 51Eur)

• For gas to come back against coal: x2 price of coal or /2 price of gas; or x8 price of C02 – not for very soon…


RES target dominates GHG target and internal energy market?

• Yes GHG target bypassed by RES (> carbon price does not lead EU decarbonization)

• Yes RES evicts gas by reducing net demand in EU wholesale market… but not coal (US Coal expulsed by US shale gas price is welcome by EU gas price)

• Yes RES & Retail charges might start pushing consumers to become prosumers (Germany retail price 250 Eur MWh vs France 140)

• …And quite high EU price level: EU wholesale price of gas = 3 times the USA; EU elec price for large industry 124$ MWh vs US 72$


Do RES dominate Security of Supply?

• 1/ RES reduce our Long Term dependence to imported fossil fuel / in 2012 = (-23%) gas imported

• 2/ However production of RES equipment is internationalizing fast (China already 1st manufacturer world wide)

• 3/ RES ask for a new European grid operation and planning – while waiting this upgrade our short term security (“reliability”) is today lower

• 5/ RES dries up market revenue for thermal plants: long term threat of unsustainable capacity investment

• 6/ EU Utilities suffer 2008-12 return (-10%) every year

www.florence-school.eu 17

Thank you for your attention Email contact: [email protected] Follow me on Twitter: @JMGlachant

Read the Journal I am chief-editor of: EEEP “Economics of Energy & Environmental Policy”

My web site: http://www.florence-school.eu

“A 3 Step Bumpy EU Energy Ride”

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